CBK wants the return of the CRB list for digital loans

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Economy

CBK wants the return of the CRB list for digital loans


Central Bank of Kenya. PHOTO FILE | NMG

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  • The Central Bank of Kenya (CBK) has called on parliament to revise a bill to allow digital lenders to resume reporting customer defaults to credit reference bureaus (CRBs).
  • Digital lenders were ordered to stop filing reports with CRBs in April last year, which the regulator said was in response to widespread abuse of the credit profiling system.

The Central Bank of Kenya (CBK) has called on parliament to revise a bill to allow digital lenders to resume reporting customer defaults to credit reference bureaus (CRBs).

Digital lenders were ordered to stop filing reports with CRBs in April last year, which the regulator said was in response to widespread abuse of the credit profiling system.

The CBK told the National Assembly’s Finance and National Planning Committee on Tuesday that digital lenders could start working with CRBs again, as they will be regulated if MPs pass the Bank’s (amendment) bill. Central Kenya, 2021.

“The 2021 Central Bank Amendment Bill should empower digital lenders to share credit information,” CBK Governor Patrick Njoroge told Parliament’s finance committee.

Lenders, including those who issue loans via cellphones and the Internet, have been accused of aggressive tactics, including threatening borrowers with a negative list.

Once digital lenders come under CBK oversight, the regulator will be able to oversee their use of credit information sharing like banks, saccos and other entities currently using the system.

The bill gives unregulated digital lenders six months to come under CBK regulation, which will allow compliant businesses.

In addition to threats of negative rating, digital lenders have also been accused of wrongly rating borrowers negatively without any process in place to resolve such errors.

Sharing credit information is one of the most powerful risk management tools for micro-lenders who typically do not take collateral from borrowers when issuing short-term loans.

A negative list makes it almost impossible for someone to take out a loan from another credit provider, serving as a deterrent against default.

Locking digital lenders from CRB listings has resulted in a 50% drop in loans issued to mobile phones. The Kenya Digital Lenders Association (DLAK) estimates that the value of loans issued each month has halved to 2 billion shillings.

Unregulated digital lenders issued a total of 4 billion shillings, or less than one percent of the banking sector’s gross loan portfolio of 3.1 trillion shillings.

They have, however, drawn the government’s attention for their predatory business practices, including exorbitant interest rates and aggressive loan collection.

It is not clear whether the interest charged by alternative lenders, which typically reaches hundreds of percentage points when annualized, will be among the matters that will be regulated.

The CBK said it would organize public participation before issuing specific guidelines once the bill is enacted.

The regulator says it will draw on the experience of other jurisdictions like South Africa to regulate digital lenders offering credit in the local market.

In addition to tackling the predatory business practices of digital lenders, the bill seeks to address concerns about illicit financial transactions, including money laundering.

Customers of digital lenders have lodged many complaints, including being charged fees they did not expect and not being forced to fully understand the costs or fees associated with loans.

Most of them ignore the terms and conditions which include frequent SMS notifications and handing over their personal data to third parties.

Some alternative lenders have used social pressure tactics to collect loans, such as notifying relatives and friends of their clients of their default.

China is among the countries that have stepped up their control over microlenders.

The Asian nation recently banned companies from giving credit to students in order to limit excessive lending.

China also caps interest rates on microloans up to four times the rate set by its central bank, the People’s Bank of China.

The use of digital loans in Kenya has grown exponentially in recent years as low-income households have been drawn to readily available credit facilities.

The CBK told parliament that around 200,000 Kenyans borrowed money on their cell phones in 2016, but that number had risen to two million in 2019, a tenfold increase.

The regulator estimates that there are more than 100 unregulated digital lenders operating in the country.

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